President Joe Biden on Thursday afternoon called for regulators to reverse Trump-era banking rules which he says weakened safeguards and supervisions for large regional banks.
The call comes just weeks after the swift failures of California-based Silicon Valley Bank and New York-based Signature Bank led to ripple effects across the industry and drew concerns about the health of the U.S. banking system writ large.
The recommended changes outlined by the White House try to put a clear blame on the Trump administration for weakening supervision of regional banks, issuing a fact sheet that said Biden’s predecessor “weakened many important common-sense requirements and supervision.”
Biden wants to revive and expand rules for mid-size banks that face less scrutiny than the industry’s behemoths, with administration officials saying that U.S. banks have stabilized since the collapse of Silicon Valley Bank on March 10 as it rolls out its recommended changes.
Once banks hold assets of more than $100 billion, the administration is asking them to hold more capital to absorb losses and face enhanced stress testing to ensure they could withstand a possible crisis. They would also need to provide the government with “living wills” to help them be unwound in case of failure.
In addition, Biden wants regulators to provide more aggressive supervision of banks and have them ensure that community banks are not responsible for replenishing the federal insurance fund for bank deposits.
The public push is part of a larger effort by the Biden administration to safeguard the U.S. economy and ensure that individual bank failures can be contained without triggering a chain reaction across the wider financial system.
Biden has also sought tougher penalties on the executives of failed banks, including clawing back compensation and making it easier to bar them from working in the industry.
The root causes of the bank failures are still being explored and Yellen planned to caution in her remarks that government officials should not prejudge any inquiries that could inform changes in regulations.
The Justice Department, the Fed, the SEC and several congressional committees have announced some form of investigation into the bank failures.
Lawmakers have held hearings with regulators from the Fed, FDIC and Treasury this week. Both political parties blame Fed officials for not quickly spotting the unique risk that the banks were exposed to by holding onto an unusually large amount of uninsured deposits. The banks simultaneously invested in long-term government bonds and mortgage-backed securities that tumbled in value as interest rates rose.
One thing that made Silicon Valley Bank’s collapse unique was the “extraordinary scale and speed” of customers trying to make withdrawals, Michael Barr, the Federal Reserve’s vice chair for supervision, told a congressional committee on Wednesday.
Barr has said the Fed’s review of the bank’s collapse will consider whether stricter regulations are needed, including whether supervisors have the tools they need. The Fed will also consider whether tougher rules are needed on liquidity — the ability of the bank to access cash — and capital requirements, which govern the level of funds a bank needs to hold.
A day before Silicon Valley Bank’s failure, customers tried to withdraw $42 billion, triggering a swift bank run that Barr said he had never seen before. “All of us were caught incredibly off-guard by the massive bank run that occurred when it did,” he said.
